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Stitch Fix CFO: ‘Certain Categories Lighter in Inventory Than We’d Like’

Stitch Fix generated a 19 percent increase in net revenue to $581.2 million, from $490.4 million in last year’s first quarter. Yet while its $1.8 million net loss (2 cents per diluted share) beat Wall Street’s estimate of a 14-cent-per-share loss, the company’s stock plummeted more than 23 percent on Wednesday after Stitch Fix downgraded in full-year sales outlook.

In a Nutshell: For the fiscal second quarter, Stitch Fix management guided revenue to $505 million to $520 million, representing growth that would come in flat to up 3 percent year over year. Adjusted EBITDA would fall in a range of a $5 million loss to $5 million in the black.

But the personal styling service does not expect 2022 to be as lucrative as expected, with chief financial officer Dan Jedda attributing the guidance downgrade to the current supply chain challenges related to ongoing port congestion and logistics constraints.

Jedda said in an earnings call that Stitch Fix is experiencing delays from one to four weeks, and that the company expects these delays to continue into the second quarter and beyond.

The company now projects full-year sales growth in the high-single digits, down from the initial outlook tabbed last year at above 15 percent.

The supply delays impacted Stitch Fix’s inventory, which fell 13 percent to $148.1 million from the $212.3 million in the year-ago period.

“We are seeing certain categories lighter in inventory than we’d like,” Jedda said. “Other categories are fully funded. And that does have the chance of impacting Freestyle in the back half just because we can’t offer the full selection of the catalog in certain categories. We are working to manage and mitigate that to the extent possible by placing orders even earlier than we normally would, and ensuring that we’re doing everything on our end to alleviate any of the supply chain constraints.”

On the brighter side, gross margins for Stitch Fix reached a record 47 percent, representing a 220-basis-point (2.2 percentage point) increase from the same quarter last year, largely driven by improved product margins and shipping cost optimizations. For 2022, the business expects gross margin to stay at 45 percent, which it took in last year.

Stitch Fix added more than 20 new brands in the quarter, including Adidas, DKNY, Vans and Rag & Bone Footwear. It also launched new owned product lines including new sustainable and U.S.-manufactured Mohnton Made, as well as the first collection from its Elevate grant and mentorship program, which supports Black-owned brands. The collection includes apparel and accessories from six brands: Diarrablu, Busayo, Kahmune, Marcus Alexander, Sarep + Rose and Chloe Kristyn.

Next year, the personal styling service anticipates adding over 50 brands and continuing to test which products drive the most traffic.

The retailer said active clients—shoppers who either ordered from its traditional “fix” subscription or bought items a la carte directly from its website over the past year—grew 11 percent to 4.18 million from a year ago. Sequentially, the company added just 15,000 net active clients, which less than 0.4 percent quarterly growth.

On the call, CEO Elizabeth Spaulding attributed the weaker-than-expected net client additions, at least in part, to the full rollout of the Freestyle “direct buy” business, which officially opened to all non-subscribing Stitch Fix shoppers in September.

The women’s footwear, accessories and dresses categories combined saw a more than 50 percent increase in year-over-year sales in Freestyle, which is five times the rate of growth the company documented in “fixes” for the same categories in the same period.

In October, the Freestyle business model grew to 19 percent of total national brand sales (sales of non-owned Stitch Fix brands), up versus 12 percent in September.

Under Spaulding, who replaced founding CEO Katrina Lake in the chief role earlier this year, the company is attempting to pivot to more of an online fashion marketplace rather than a subscription styling service as a way to acquire more consumers.

Stitch Fix ended the quarter with $401 million in cash, cash equivalents, and securities, as well as $125 million in free cash flow and no debt.

Net Sales: Net revenue for the first quarter was $581.2 million, an increase of 19 percent year over year from $490.4 million generated in the year-ago quarter.

Net revenue per active client rose 12 percent to a record $524. Spaulding said the growth came as more shoppers bought extra items of clothing, in addition to their subscriptions.

Net Earnings: Net loss was $1.8 million, or 2 cents per share, down from net income of $9.5 million, or 9 cents per share, in the year-ago period. Adjusted EBITDA in the period was $38.2 million, up from the $6.9 million taken in during the 2020 first quarter.

The operating loss totaled $1.9 million, compared to an operating loss of $19.5 million in the year-ago period.

CEO’s Take: “We’ve grown top-line net revenue for Freestyle 40 percent year over year,” Spaulding said. “We saw penetration increased quarter-over-quarter as we continue to see our clients leveraging both fixes and Freestyle, demonstrating the complementarity of our growing offering. We are also capturing more purchase occasions through Freestyle and product categories that have been underrepresented in Fixes such as footwear, dresses, outerwear, accessories, and sleep and loungewear.”

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